Impact Fees: A Good Idea Gone Bad

Impact fees, like so many government programs, start out as a good and sensible idea, but ultimately end up being destructive. In this article, I explain the problems with impact fees and how I came to my recent decision that they should be ended completely.

It just makes perfect sense. A developer, whether it’s an individual or Realtor building a home or a larger developer building an apartment complex or office park, needs to pay directly for the services he requires from the government, such as water and sewer. Therefore, the government starts charging a fee-for-service, since it does take money to hook them up to the water and sewer lines and to send out the people necessary to get the job done. And it would be completely unfair to make others pay for it with their tax money. This is all very sensible, and perfectly in line with Libertarian principles.

But recently, I’ve come to realize there’s a huge problem. As with all things in government, once you give it the power to do something, no matter how sensible, and no matter how limited, it isn’t long before it gets amended and expanded way beyond its original scope. And so you end up with something that harms others and is ultimately destructive. Enter Impact Fees. If we’re going to charge developers to hook up to water and sewer lines, then we’re also going to charge them their “fair share” of the money that should go to, say, schools (despite the fact that they’re already paying it with their property taxes). So it gets moved from a fee-for-service, that just goes for one particular, limited, and even legitimate function, into something indirect which is nothing more than a thinly-veiled revenue generator. But it wasn’t until speaking with members of the Lincoln County Home Builder’s Association recently that I became aware of this effect, an effect I’ve taken great pains to point out on other issues. Really, I should’ve known better.

This isn’t the way revenue generation is supposed to work. Fees paid out for services should go to cover only the cost of the service rendered. The fee that developers pay for building should only go towards any related expenses, such as hooking up to water and sewer. It should not go to cover even the normal operation of the sewer, as that should come out of the taxes and fees that everyone, including the new developers, pay for it. New residents and businesses shouldn’t have to pay a penalty just because they came here later. And they certainly shouldn’t be used to pay for completely unrelated services like schools. What’s worse, the things that impact fees are ostensibly supposed to pay for are things we end up paying for in taxes, anyway—so we’re getting hit with a double-whammy.

The reason why these fees are needed, we are told, is because we just went into debt $47 million (more than that, actually, when you consider the interest—see Fixing Our Local Schools) and the only other option would be to raise property taxes. But it isn’t the developers’ fault we’ve allowed our schools to fall into disrepair; it isn’t their fault that we ended up needing to expand beyond the time to do so; and it isn’t their fault that we’ve done such a poor job helping our schools to keep up with growth. Not only that, the ones who pay property taxes are largely the ones who got to vote for the referendum. Why let them get out of paying for it? Why shift that burden onto new people moving into the county, who didn’t even get to vote on it? Wasn’t there a little bit of controversy awhile back over “taxation without representation”? Maybe if more taxpayers felt the pinch of deficit spending, they’d be a little more cautious and skeptical about voting for bond referenda.

Impact Fees, and their uglier cousins known as “real estate transfer fees,” end up being punishment for people who want to come here and live and work and run businesses. When an individual or business moves in on its own, it gets hit with the fee. And if the developer is not the person or business who will be using the property, the cost just gets passed on. All of this creates a disincentive for growth. Without them, growth would rise, and—this is an important bit—so would revenues. Let’s not forget that these people would have to pay property taxes, taxes which would be much greater now that the property is developed and its value has risen.

As good an idea as the fee-for-service is, we must be extremely cautious of giving the government any kind of power, no matter how helpful. As Michael Cloud said, “The problem is not the abuse of power; it’s the power to abuse.” End impact fees and transfer taxes. If we need to have developers pay a fee to install water and sewer lines, then let them pay it directly into a separate budget item that can only be used for that purpose. And let them have a choice, for example, to build a well and septic system when the type of development and the location makes it possible. That would help keep these fees in check, since developers could just opt out of the system if they get too high.

Let’s not stifle our future. End Impact Fees and let people build a better tomorrow for our county.